May the Space Force Be With You: Opportunities in the Future of Security

As described by the World Economic Forum, The Fourth Industrial Revolution represents a seismic shift in how we live, work and relate to each other.1 Advances in artificial intelligence, automation and technology are its hallmarks, and this revolution is bringing us a reality we previously only imagined, including the arrival of future security.

The topic of future security and how we'll protect ourselves as The Fourth Industrial Revolution unfolds ranges from the use of drones for border control to cyber-related defense systems to a more advanced military featuring robotics and artificial intelligence. One aspect of the future of security debate taking on increased urgency is planning for warfare outside the earth’s atmosphere, which is creating the possibility of other-worldly opportunities for investors.

May the space force be with you

The idea of a Star Wars-like battlefield populated with destroyers and Star Cruisers no longer belongs in a “galaxy far, far away.” In March, President Donald Trump revived the debate about the Pentagon’s space activities with talk of the "space force," a branch of the military that would operate in space.2

After that speech, he unveiled an America First National Space Strategy aimed at “powering a vast new industry, spurring incredible new technology, and providing the space security we need to protect the American people.”3 The strategy calls for the dynamic and cooperative interplay between the national security, commercial and civil space sectors.

While Trump may have generated headlines for this futuristic vision, he is certainly not the first to float the idea of a space force. Russia established its space force as a branch of the Russian Aerospace Forces in 20154, while China has its own aggressive space program that is developing weapons to take out US satellites.5

Before Trump's announcement of a space force, politicians in DC were mulling the formation of a militarized outer space and a "Space Corps". House lawmakers included language on separating Air Force functions—one for aviation and one for space—in a draft of the defense-spending bill, the National Defense Authorization Act (“NDAA”).6 While “Space Corps” was removed from the final bill, it did call for studying how space could become a war-fighting arena. Additionally, the final bill included a series of changes to existing space programs aimed at “fixing the broken national security space enterprise.”7

The finalized fiscal 2019 defense-spending bill appropriates nearly $12.5 billion to national security in space.8 While $12.5 billion is just 2% of the total $686 billion budget, the figure is $1.1 billion higher than the 2018 fiscal budget request and 18% higher than the five-year average.

Cybersecurity plays a critical role in future security

While space is a crucial security issue, it is not the only hot-button issue facing future security. Cybersecurity is another pressing concern.

The chart below shows yearly US Department of Defense cybersecurity spending, which is on an upward trajectory and is likely to increase. Nearly 1,300 data breaches occurred in 2017—a 21% increase from 2016—and more than 174 million confidential records were exposed, according to the Identity Theft Resource Center. With statistics like that, it’s no wonder that Warren Buffet sees cyber-attacks as a more significant threat to humanity than nuclear weapons.9

While the cybersecurity war is fought virtually, The Fourth Industrial Revolution means the physical instruments used to wage war in the real world are also changing. Already, we see increased use of drones and robots, and plans for weaponized military space-related activities.

In the future of security, unmanned aircraft are likely to play a more significant role. Last year, the Department of Homeland Security (DHS) issued a request calling for compact drones to be used by border patrol agents. Using border patrol drones is not new—unarmed Predator drones have been used there since 2005. But drones under the DHS program would represent next-generation aircraft that can perform facial recognition and other biometrics. By 2020, the illustration below shows military drones could potentially represent 70% of the $100B drone market, according to Goldman Sachs research.10

Explore a new investment frontier

Like space, the ecosystem for the future of security is expansive, requiring a forward-looking method to identify firms that may benefit from this technological shift. One way to do this is with a modernized approach to investing in sectors and industries.

Kensho Technologies is a data analytics and machine intelligence company that has leveraged their natural language processing (NLP) and data science capabilities to create new indices designed to capture the technological shifts of our modern economy—specifically, the future of security. This innovative approach is one reason we partnered with Kensho to develop a suite of SPDR® Kensho ETFs. These ETFs aim to capture US-listed firms whose products and services are driving innovation behind the industries and sectors at the heart of The Fourth Industrial Revolution.

The SPDR® Kensho Future Security ETF (XKFS) seeks to track the Kensho Future Security Index, which invests in companies whose products and services are spurring future security innovation. For example, besides including rocket and missile makers like Lockheed Martin or Raytheon, the Kensho Future Security Index includes II-VI International, which makes military lasers and optical components, and Jacobs Engineering, which provides construction services to aerospace facilities.11 Kensho's dynamic indices mean XKFS has a dedicated space component within its exposure.

Future security has arrived. XKFS may be one way for investors to potentially harness the full potential of a "space force" and the rapidly evolving shifts in how we protect ourselves on Earth—and beyond.

1"The Fourth Industrial Revolution: what it means, how to respond," World Economic Forum, as of 1/14/20162"Trump floats the idea of creating a 'Space Force' to fight wars in space," cnbc.com, as of 3/13/20183"President Donald J. Trump is Unveiling an America First National Space Strategy," whitehouse.gov, as of 3/23/20184"Russian Military Merges Air Force and Space Command," themoscowtimes.com, as of 8/3/20155"Trump wants to stand up a military 'Space Force.' Here's why." washingtonpost.com, as of 4/13/20186"Trump floats the idea of creating a 'Space Force' to fight wars in space," cnbc.com, as of 3/13/20187"Trump floats the idea of creating a 'Space Force' to fight wars in space," cnbc.com, as of 3/13/20188SpaceNews.com, as of 3/21/20189"Buffet: This is the number one problem with mankind," Business Insider, as of 5/6/201710“Drones: Reporting for Work,” Goldman Sachs Research, estimates for global drone market, 2016–202011Bloomberg Finance L.P., State Street Global Advisors, as of 3/31/2018

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